Topic Area: Regional Trading Blocks and their Impact on the Environment

Geographic Area: Mexico

Focal Question: Has NAFTA worked to severely degrade the Mexican environment like proponents of the pollution havens hypothesis would suggest?

Sources:
(1) Schatan, Claudia. “Mexico’s Manufacturing Exports and the Environment under NAFTA.” Commission for Environmental Cooperation of North America. 2002.

(2) Ferrantino, Michael J. “International Trade, Environmental Quality and Public Policy.” In an International Economics and International Economic Policy ed. By Philip King. Irwin McGraw-Hill. Boston. 2000.

(3) Mumme, Stephen P. “NAFTA and the Environment.” Foreign Policy in Focus.” Interhemispheric Resource Center and Institute For Policy Studies. Vol 4. No. 26. October 1999.

(4) Moss, Joanna. “The First Five Years of the NAFTA Agreement.” In an International Economics and International Economic Policy ed. By Philip King. Irwin McGraw-Hill. Boston. 2000.

Reviewer: Benjamin S. Hoffman, Colby College ‘03

Review:

With the negotiations of the NAFTA accords in the early nineties, environmentalists were extremely worried that Mexico’s environmental standards, which are much lower than the United States’ would pose significant problems that would outweigh the efficiencies that would be gained through the reduction of barriers. These problems stem from two sources. Firstly, many environmentalists firmly believe in the concept of pollution havens, where environmental regulation in developed countries has accelerated the relocation of production in polluting industries to countries with weaker standards in order to escape the compliance costs of the new regulations. The second problem stems from the proverbial ‘race to the bottom’ effect that is theorized to occur. In order to compete with the weaker Mexican standards, there would be pressure on the United States government to weaken its own standards. However, even though the theory appears to make logical sense, the evidence in the case of Mexico and NAFTA suggests otherwise.

In the case of the pollution havens argument, if such a phenomenon were to exist, one should see an increase in the amount of pollution intensive exports to the United States in the years after the NAFTA agreement. At the surface, it appears that US imports of highly polluting Mexican products increased sharply. However, a closer look reveals that as a proportion of total trade, these heavily polluting goods actually declined in their significance substantially. If Mexico’s composition of exports had remained constant from 1992/1993 to 1997/1998, then pollution in Mexico would have increased by 59.8 million tons. In reality though, Mexico’s pollution from export activity only increased by 30.4 million tons. This striking difference can only be explained by a relative shift away from polluting industries, in stark contrast to what was predicted by the pollution havens hypothesis (Schatan).

There are several reasons why the expected shift may not have occurred. Firstly, relocating production is a very expensive process and thus the time frame that is being examined may be too short to fully pick up the full extent of relocations. Secondly, even for the most heavily polluting industries in the United States, the percentage of costs that are borne in environmental compliance are no more than about 2% of the product’s value and usually much lower (although there are small reductions in factor productivity that must be taken into account as well) (Ferrantino). However, one could argue that the pollution havens hypothesis is still occurring, but is being obscured by the fact that heavily polluting industries are declining as a major driver of the economy as observed in the rise of service industries. In fact, while heavily polluting exports did rise significantly, Mexican imports of similar products also rose significantly. Thus, the evidence seems to suggest that rather than a relocation of production in the wake of NAFTA, we have an intensification of trade as each country specializes in the particular niche of the chemical industry (for example) that it specializes in.

Perhaps the reason that the relocation of heavily polluting industries to Mexico has not occurred is due to the ‘race to the bottom’ effect where it is the United States that is reducing its regulations to convince its domestic industries to stay in country. However, a closer look at US environmental regulations suggests that there was little change in the aftermath of NAFTA and definitely no changes large enough to warrant a company on the verge of leaving for Mexico to stay. Supporters of this theory would point to George W. Bush’s election and his subsequent movements to reduce environmental regulation. However, this argument holds little water as not only was a pro-environment administration elected after NAFTA passage (Clinton-Gore in 1996), but also Al Gore won the popular vote in 2000, which is hardly indicative of strong popular pressure to reduce environmental standards. Additionally, standards are rising in Mexico, especially under Vincente Fox’s leadership, which completely contradicts this hypothesis. Additionally compliance with the standards are rising significantly, especially in the maquila region near the US border where compliance has increased from less than 20% to over fifty percent in a period of just a few short years.

Thus, in the case of NAFTA and Mexico, it is clear that a political decision to create a free trade area in the hopes of promoting economic efficiency will have long-run beneficial effects, as production can now occur more efficiently, which reduces the strain on both resources and the environment for a given level of production. And admittedly, while environmental conditions in Mexico have not improved since NAFTA, it is likely that without NAFTA, they would have been worse but for pure economic reasons, and the fact that NAFTA brought with it the Comission for Environmental Cooperation in North America, the North American Development Bank, and other institutions designed to promote the cleaner and more efficient development of Mexico.